Lex Machina and RPX have both recently issued reports on patent litigation in 2015. This post provides our take on what the numbers mean. You can see the reports at the following links:

Lex Machina 2015 End-of-Year Trends
RPX 2015 NPE Activity

The Lex Machina report makes it sound like patent litigation is near an all-time high:

Patent litigation in U.S. district courts grew in 2015 with 5,830 patent cases filed, a 15.0% rise from 2014 (5,070 cases).  Except for 2013, which remains the high-water year for patent litigation (6,114 cases), 2015 surpassed all other previous years.

That’s true if you believe the relevant number is “cases filed.” It’s not.

For one thing, number of cases was hugely impacted by the 2011 America Invents Act which put limits on how many defendants a patent owner could put together in one court case. What Lex Machina shows as an “explosion” in patent cases in 2012 – a jump from 3,575 in 2011 to 5,454 in 2012 – is not because there was huge boom in litigation. It’s because Congress changed the rules. If you look at Total Defendants Added to patent cases – the number of entities being sued, from the RPX report – there was actually a decline from 2011 to 2012, from 7,849 to 6,940.

Going by the total defendants added, 2015 was still the second highest year though – after 2011, not 2013.

But there’s another problem with saying that 2015 was nearly an all-time high for litigation: it doesn’t take into account the fact that there are more patents, because there has been a tremendous leap in the number of patents granted every year.  This may indicate a different issue—but not a topic for today.

If there are more patents, “it must follow, as the night the day,” that there will be more patent litigation. Since patents are a right to exclude they must be enforced to have any value, and that will mean more litigation.

The above chart shows what we believe is a more accurate measure of the pace of litigation: the number of defendants added divided by the number of active utility patents, the rate of patent litigation. We took the total active defendants and NPE data from the RPX report (RPX not only collects data from the automated system PACER, it manually scrubs the data) and compared it with the total active utility patents from a post on PatentlyO.  What we see is that while the rate of litigation is up in 2015, 2015 is still the second LOWEST rate of litigation since 2010. The whole concept of an “explosion” in patent litigation fails to take into account the fact that there has been an “explosion” in the number of live patents.

Ignoring the number of live patents would be like ignoring inflation when reporting financial numbers. The highest grossing film of all time is Avatar, with revenue of $2.8 billion. But if you adjust for inflation, the highest grossing film of all time is Gone with the Wind. In 1965 the average house in the US cost $20,300; in 2015 the average car cost $33,000; but that doesn’t mean anything because it doesn’t take into account 50 years of inflation. Houses are still more expensive than cars (generally speaking).

Something interesting did happen in 2015 though – NPE litigation is way up. Total defendants added in NPE cases, 5,349, IS at an all-time high. Operating company litigation actually showed a slight decline from 2014.

What gives? Between the new ways to challenge patents at the patent office (inter partes Review and Covered Business Method Patent Review) and the Supreme Court’s Alice decision, aren’t NPEs supposed to be suffering? In a decline?

2014 had the fewest number of defendants added in NPE cases in the last six years; 2015 had the most. There are several explanations for the growth.

  • Patents are valuable assets. IPRs and Alice may have introduced some uncertainty, but they haven’t (yet) totally destroyed the value of patents. Where there are valuable assets there are smart people who will figure out ways to make money with those assets.
  • IPRs and Alice may have ironically contributed to an increase in litigation. Back in the “good ol’ days” – pre-AIA and pre-Alice – patent owners could often negotiate a settlement with infringing companies. The uncertainty introduced by the changes in the patent environment has simply encouraged “efficient infringing.” Many operating companies figure they have better chances than ever at winning in court, so why negotiate a license? As a result, patent owners who want to protect their intellectual property have no choice but to litigate.
  • Since patent owners cannot allege infringement without risking the infringing company filing a request for a Declaratory Judgment (and taking control of venue) many patent owners choose to file law suits before opening discussions.
  • New rules came into effect in December on what paperwork is required to file a patent lawsuit. The simple “Form 18” that had been used for years to file patent lawsuits is a thing of the past. Filing patent lawsuits now takes more paperwork and is more expensive. As a result, there were more NPE lawsuits filed on November 30 than on any other day in history.

Patent owners are no dummies. Change the rules and they, and their lawyers, will adapt to the changes. It’s good that Congress has lost its zeal for pushing through patent reform. It’s not even known yet what the full impact of the AIA will be. Few would deny that the AIA has generated “unintended consequences,” many of which don’t even show up in these litigation statistics.  IPRs are being used in a variety of “creative” ways, not just as a way to “stop patent trolls.” Operating companies are using them to attack competitors. Pharma wasn’t expecting to be on the receiving end of IPRs when it enthusiastically embraced the AIA.

There is one thing that makes the number of cases filed an interesting statistic: RPX and Lex Machina have wildly different numbers.  According to Lex Machina, there were 5,830 cases filed in 2015. According to RPX there were 5,203 (both are looking at “total” cases). That’s a difference of over 10%, which is a significant difference (for what it’s worth, we think RPX is closer to being right).

Statistics such as these are of no use in guiding policy until you get behind the numbers and truly understand them.  While the carnival barkers like Bessen and Meurer will undoubtedly use this 2015 litigation statistic as “evidence” that we need more “patent reform” we hope that thoughtful people who set policy (at least the ones not on Google’s payroll) will pause and ask a few questions about the numbers.

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